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Business Taxes Law Guide—Revision 2024

Sales And Use Tax Court Decisions


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C


Culligan Water Conditioning v. State Board of Equalization … (1976)


Furnishing of Water Conditioning "Exchange Units" Is Lease Rather Than Service

Plaintiff furnished to its customers water conditioning "exchange units" acquired without payment of sales tax reimbursement or use tax. The exchange units were inserted into the plumbing of customers homes and were replaced periodically by plaintiff in order to provide soft water continuously. The customers paid an initial charge for plumbing system alterations and thereafter paid monthly or bi-monthly charges. The Board asserted tax on the periodic payments on the basis that they were receipts from the lease of tangible personal property. Plaintiff paid the tax asserted and sued for refund on the basis that the periodic payments were for the service of providing soft water, and receipts from sales of services are not subject to tax.

The Supreme Court overruled the trial court and upheld the position of the Board. The court held that while an administrative agency's interpretation of its own regulation deserves great weight, the ultimate resolution of such legal questions rests with the courts. The court then went on to find that the transaction contained the requisite elements of a "hiring" under Civil Code Section 1925 as well as the elements of a "lease," and that the "real object" of the customer within the meaning of Sales and Use Tax Regulation 1501 was to obtain the property produced by the service rather than the service per se. Culligan Water Conditioning v. State Board of Equalization (1976) 17 Cal.3d 86.